Risk surges in Q2 as China and Greece spur investor worries

Risk3Market risk dramatically increased in the second quarter (Q2) of this year, driven by concerns over the downturn in China’s market, and the uncertainty surrounding the Greek bailout.

A sharp increase in bond volatility was a further contributing factor, according to a report released by risk management firm, Axioma.

In contrast, the Quarterly Risk Report also found that energy prices stabilised during Q2, lowering the oil sector’s volatility.

“The bulletproof optimism we witnessed in the first quarter caved in the second quarter,” says Melissa Brown, senior director of applied research at Axioma, and author of the report. “Risk rose as Europe fretted over Greece, while angst in Asia was driven by events in China.”

She adds that the outlook in the US and Canada was more favourable, with better news on the economic home front, steadying oil prices and more stable interest rates having a positive effect on risk. The Nasdaq hit a record close toward the end of the quarter and volatility for small-cap US stocks fell below that of those in the larger-cap space.

“In fact, the US likely benefited from the turmoil elsewhere, as the [Federal Reserve] decided to postpone planned rate increases, in light of the situations in Greece and China,” she says.

In China the sharp rise and then fall in stock prices caused a jump in China’s volatility forecasts. Correlations between factors also changed dramatically, posing particular challenges for managers using risk models.

“We expect volatility in Europe and Asia to remain at these levels for the time being, rather than retreat back down to recent low levels,” says Brown.

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